October 21, 2020 | Herd Immunity

Remember the words posted here weeks ago about the coming condo collapse? Well, presto. It’s here. At least the beginning. Right on cue.

For example, a one-bedder unit just steps away from the sky-darkening bank towers at King & Bay in the Big Smoke was commanding $1,200 for each of its six hundred feet in March, before Covid came to town. This week? That’s down to $785 a foot, which is a fat 34% discount from the market value just seven months ago.

But there’s more. Says the listing agent, desperately: “***Seller Will Pay 6 Month Maintanence Fees If Sold By Oct 15,2020***” (realtor spelling, not mine). That monthly condo fee, by the way, is $800. So knock another five grand off the price.

Bottom line: a fully-renovated, low-rise unit in a great building in a hot location that commanded $720,000 pre-virus is now on the market for $480,000. Odds are the seller is a dude who was renting it out for two hundred a night as a perfect downtown Airbnb unit (now illegal) or soaking $2,250 a month from a young legal secretary in a gleaming skyscraper who’s now WFHing in mom’s basement in Ajax.

And rents? Pshaw. As we told you, there’s already been a 15% reduction in the cost of leasing a condo in Toronto, with rates now eroding in Vancouver and Montreal where new condos are starting to come online and listings pile up. Too much supply, not enough demand. It’s classic.

This week the global financial press started to take notice. “In the world’s big financial centers — from New York to Toronto to London to Sydney — rents for inner-city apartments are plunging,” reports Bloomberg. “International students who normally bolster demand are stuck at home and young renters — the most mobile group in real estate — are finding fewer reasons to pay a premium to live in what is, for now, no longer the center of things.”

Everywhere, a similar story. Demand has been eroded by an abrupt halt to immigration, the shuttering of major office complexes, the meme that workers will never have to go downtown again (amusing), cities curtaining mass transit, a reduction in Airbnb’s toxic presence, uni students learning online plus a flowering of the suburbs and real estate with front doors and back yards as work-from-homers crave more space and fewer germs.

Meanwhile supply is erupting as new residential complexes come to market, negative cash flow crushes amateur investors, short-term rental hosts have no clients and the tenant pool dries up along with jobs in restaurants, bars, clubs, hotels, offices and downtown retail outlets. (For example, sales are down more than 90% for stores and services along the Path – that glitzy 30-km-long underground complex beneath the pavement in Toronto.)

“With remote working in vogue for everyone from banks to tech companies,” adds Bloomberg, “and the quirky shops and bars that made living in a city fun curtailed, the equation about where to live is changing. And so is the balance of power between landlords and tenants.”

Exactly.

So, there are some lessons here.

Like never get caught up in FOMO. For the past few years urban DT condos have been hot properties as thousands of units hit the market at ever-rising prices and ever-smaller footprints. In a place like Toronto most were bought from plans in the pre-con phase, at least half by people who never intended to occupy them. Even with competition among tenants, those big mortgages and high ownership costs meant more than 40% of all landlords were losing money. So long as valuations were increasing, the suckers were willing to eat the loss. But now? Whoops.

Lesson: buy stuff that makes money. Speculation can kill you.

Another one (very radical): buy low, not high.

People flocked to condo investments because (a) financing was cheap and easy to get, (b) they like the overlord feeling of being an landlord, extracting rent from serfs, (c) real estate values always go up while financial assets are risky and (b) everyone else was doing it. In reality, landlording costs usually exceeded income, any net profit was 100% taxed and because most people bought into a rising wave, they’re now being Hoovered.

But I know this takes courage. To resist the crowd’s siren song when an asset is expensive, inflated, sexy and aroused. And, equally, to buy things that are unloved, declining, deflating, cheap and flaccid. Today the crowd is storming Hicksville, jacking values of dodgy houses in cities where commuting downtown is impossible and/or suicidal. Also today we have a 34% drop in the value of prime downtown units amid the belief that what happened over the last eight months will set the scene for the future. Forever and amen.

Apparently the herd never learns. And thank goodness for the rest of us.

Garth Turner October 21st, 2020

Posted In: The Greater Fool

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